STAAR Surgical (STAA) Medical Technology · Anne Stevenson-Yang [email protected] +1 860 391 6094 See final page for disclaimers. 5 August 11, 2020 STAAR Surgical STAA ‣

August 11, 2020

STAAR Surgical (STAA) Medical Technology

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August 11, 2020


STARR Surgical (STAA)

Less Than Meets the Eye

We think that STAAR Surgical has overstated sales in China by at least one-third, or $21.6 mln. That would mean that all of the

company’s $14 mln in 2019 profit is fake.

A single Chinese distributor accounted for 43% of STAAR’s total sales and 71% of its growth in 2019 and over half in Q2 this year. In the 2019 10K, STAAR reports: “One customer, Shanghai Langsheng [sic], our China distributor who sells in to China and Hong Kong, accounted for more than 43% of our consolidated net sales during fiscal 2019.” 1

1 The proper spelling of the distributor is Lansheng.

The residential compound where Shanghai Qinghong Trading Co. Ltd., a distributor of STAAR products in China, is registered. The compound is over 50 km from Shanghai city center. Guard would not allow us to enter. Photo by J Capital July 2020.

Anne [email protected]

+1 860 391 6094

https://jcapitalresearch.app.box.com/s/65cy7z1br7ropy1usrw1rv927z3tx1ej

https://jcapitalresearch.app.box.com/files/0/f/3236012520/1/f_27196548308

© 2020 J Capital Research Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J Capital. Use of this publication by authorized users is subject to the J Capital Authorized User Content Agreement available here. Use of this publication by non-authorized individuals is subject to the J Capital Non-Authorized User Content Agreement available here.

August 11, 2020


Unfortunately, the Chinese numbers (which are not audited 2) are unre-liable.

STAAR makes Implantable Collamer Lenses (ICLs) to correct severe myopia. ICL surgery is about three times as expensive as the more common LASIK procedure, and high out-of-pocket costs tend to dis-courage all but the most myopic.

Ex-China, STAAR sales growth has been unremarkable, yielding a 5% CAGR for the last decade, and profit has mostly been elusive despite 38 years in business.

But China sales show a 37% CAGR over that same period. That growth has driven up the share price.

2 See the PCAOB website. The Chinese affiliate of STAAR’s auditor, BDO, is not involved with the STAAR audit. BDO may not conduct audits in China directly. https://pcaobus.org/issuers/17702/718937

Share Price in USD $54.16

Market Cap in USD (mln) $2,319.00

Av volume (shares) 675,433

Price/Sales 15.8x

Price/Ebitda 123x

STAAR Surgical (STAA)

STAAR Surgical (STAA) last share price in USD (blue, left) and volume (green, right, mln shares)

Source: S&P Capital IQ August 10, 2020

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Chart 1. Ex-China STAAR Sales (mln USD) and YoY Growth

Source: STAAR financial statements


https://jcapitalresearch.app.box.com/files/0/f/3236012520/1/f_27196548308

https://pcaobus.org/issuers/17702/718937

https://pcaobus.org/issuers/17702/718937

Anne Stevenson-Yang [email protected] +1 860 391 6094 See final page for disclaimers. 4

August 11, 2020

STAAR Surgical STAA

After extensive research into STAAR’s worldwide operations, with a focus on China, we have concluded that STAAR China sales are overstated by about 33%. Fake sales come at 100% margins and therefore translate di-rectly into profit. That means that the roughly $21.6 mln in overstated Chi-nese sales in 2019 represent 152% of total company profit. In other words, without the fraud that we believe pervades the China business, STAAR is losing money.

We have conducted over 75 interviews, visited company sites in China and Switzerland, and reviewed financial statements and other government documents for STAAR’s distributors and customers in China. We will show that sales of STAAR’s ICLs are dramatically overstated.

The overstated salesWe offer four types of evidence:

‣ Financial statements of the largest Chinese client, Aier Eye Hospital, indicate that those clinics bought only about half as many lenses as STAAR’s distributor claims. Aier represents about half of China sales and 25% of total sales, according to our interviews.

‣ Public data show that the value of lenses exported from Switzerland, the source of all product STAAR sells in China, is far lower than the reported sales.

Chart 2. China Revenue Growth, Total Revenue Growth, and Share Price (LHS, in USD)

Source: Company disclosures, S&P Global


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STAAR Surgical STAA

‣ In interviews, Lansheng’s Tier 2 distributors told us how many lens-es they sell, and the numbers suggest a lower volume than claimed.

‣ Inventories, PPE, and manufacturing activity do not appear to sup-port large annual volume growth.

The biggest client not so bigSTAAR has not said much to investors about its largest client, Aier. It has posted a public notice in some Aier clinics stating that Aier has been the largest ICL partner each year since 2015.

We spoke to a dozen people familiar with STAAR’s sales in China, and they agreed that the STAAR sales numbers assume that 65,000-75,000 lenses—half the volume sold in China--were sold to Aier Eye Hospital Group (300015 SZ) in 2019.

But Aier’s public financial statements indicate that its purchases from STAAR should be no more than 41,192 lenses, 43% fewer than our inter-viewees told us.

Based on Aier’s 2019 annual report and our interviews with Aier manage-ment, we estimate that Aier performed at most 20,596 ICL surgeries in 2019. This is based on Aier IR, which told us that 15-20% of “refractive sur-gery” revenue comes from ICL implants—we took 17.5% of Aier’s reported refractive surgery revenue for 2019. IR also told us that the ICL surgeries cost about ¥30,000. Based on those two data points, we calculate 20,596 ICL surgeries in 2019. If all the surgeries involved two lenses, then STAAR

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Chart 3. STAAR China Growth as a % of Total

Source: Company filings


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STAAR Surgical STAA

sold at most 41,192 lenses to Aier in 2019, not the 65,000-75,000 that Lan-sheng and STAAR China told us.

Our interviews with Lansheng and Aier procurement found that Aier pays an average of at least $585 per lens, and Lansheng receives a roughly 17% commission on the Aier sales. For 41,192 lenses, that would mean $20.2 mln in revenue to STAAR in 2019, not the $32.4 mln that would represent half of China revenues.

The notice above, posted in an Aier clinic in Beijing, reads “As a division of Staar Surgical AG in Greater China, STAAR Optical Equipment Technology (Shanghai) Co., Ltd. hereby verifies that Aier Eye Hospital Co. Ltd. has been Staar Surgical’s largest global partner for the implantation of ICL lenses for five years running, 2015, 2016, 2017, 2018, and 2019.” | Photo by J Capital August 2020.


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STAAR Surgical STAA

Aier has ample means to obfuscate its lens purchases. We learned in an interview with an Aier executive that the company has a subsidiary at a non-existent address in Tibet that is dedicated to processing purchases of STAAR lenses. This company, called Shannan Youshi (”Improved Vision”) Medical Equipment Co. Ltd., pays STAAR for lenses and takes payment from the Aier hospitals, with little scrutiny of accounts; Tibet is notorious for providing operational opacity to companies.

We asked a photographer to visit the premises, but the address does not ex-ist. We telephoned the registered phone number, and it was a non-working number.

Aier reported impressive growth in revenue from refractive surgeries in 2018 and 2019, but the growth was well below what STAAR reported in revenue growth for China. In 2018, Aier reported 46% growth in refractive surgeries compared with STAAR’s report of 88% growth in China revenue, and in 2019, Aier reported 26% growth, against STAAR’s report of 41% growth in China.

Even before the Covid-19 crisis, our interviews with Aier doctors and Lan-

Aier reported 2019

Est revenue from ICL procedures (mln RMB) ¥617.88

Average surgery price ¥30,000

Est number of surgeries 20,596

Est number of lenses (@2 per surgery) 41,192

Aier average lens price in USD $585

Est commission to Lansheng 16%

Total Revenue to STAAR for Aier lenses 2019 (mln USD) $20.24

Table 1. Aier ICL Purchase Calculation

Source: Aier 2019 AR, Aier IR, STAAR reports, Lansheng interviews

Government registration record via Qixin


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STAAR Surgical STAA

sheng formers indicated slowing growth in sales. A former business man-ager at Lansheng told us in August 2019: “Aier demand is flattish. People are much more interested in LASIK. People feel nervous about having an implant.”

In Q1 2020, Aier reported that its revenues dropped by 27% YoY and profit declined by 73%. Most clinics across China were closed for elective pro-cedures from late January through March. Yet STAAR reported that its China ICL unit sales for the quarter rose by 7% year on year. We checked with two distributors to see whether they had stockpiled inventory, and the answer was no. Nor is there inventory at hospitals. “Public hospitals do not carry inventory,” one of the distributors said to us.

Aier executives told us that 10 of their hospitals do carry inventory, but Aier’s financial statements indicate that inventory was flat in Q1 2020 on Q4 2019. That means the 7% reported growth is unlikely.

The plugSTAAR compensates for this sales inflation, we believe, with the market-ing budget, which was $45.5 mln in 2019, 30% of sales. We spoke with sales and marketing executives in China, in the U.S., and in Europe as well as with former C Suite executives, and none could identify promotional spending nearing $45.5 mln a year. These executives, including longtime regional sales directors, told us they estimate that the company spends no more than a couple million dollars on marketing. Local marketing costs are borne by the distributors.

Instead, according to a highly placed former executive, STAAR inflates sales and then balances the “income” by marking up marketing costs. Ac-cording to a former executive, marketing “subsidies” may be around one-third the stated value of the lens, so that the distributor buys the lens at $300 but STAAR books the sale at $450 and in order to hide the phantom revenue allocates the $150 to marketing. This means that STAAR is able to toggle sales at will using its marketing budget.

STAAR’s marketing budget is completely out of proportion to its costs. STAAR supports conferences and doctor training, but in China, we could identify maximum $500,000 annually in training expenses. We purchased a credit report on STAAR China and found that that company paid out just $127,698 in marketing expenses in 2019. Yet China represented 43% of STAAR’s sales in 2019.


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STAAR Surgical STAA

China sales volumes fall shortWe interviewed both Lansheng and its sub-distributors about their sales volumes. When we totaled up the numbers they gave us in interviews, we found volumes fell short of what they would have to be to rack up $64.8 mln in sales. Based on the prices Lansheng pays STAAR for lenses—which we have confirmed with STAAR formers—the company should have sold 129,000 lenses in 2019. But we counted only 70,050 in total, including the 41,000 we estimate Aier purchased.

Lansheng has eight Tier 2 distributors. Two of those are shell companies as-sociated with STAAR and Lansheng staff that do not appear to have staff. The other six companies each estimated 2019 sales volumes for us in interviews.

Source: China Tax Department

Company Name Number Sold in 2019 Note

Shanghai Leyue Optical Equipment Co., Ltd. Owned by former STAAR staff

Guangzhou Shiran Medical Equipment Co., Ltd. 3,000 2019 sales rose by 30%

Beijing Jiashikang Technology Co., Ltd. 8,000

Changsha Tianzhi Medical Equipment Co., Ltd. 12,000

Shanghai Qinhong Trading Company Owned by Lansheng owner. No staff or physical presence.

Shenyang Wanli Road Technology Co., Ltd. 500 "Very low sales"

Shaanxi Shangbo Trading Co., Ltd. 1,800

Chongqing Shangzhou Medical Devices Co., Ltd. 2,750

Total Inventories 1,000

Total Lenses 29,050

Table 2. Interviews on Lens Sales 2019

Source: J Capital Research

STAAR Surgical STAA


August 11, 2020

STAAR Surgical STAA

In total, those six companies said they sold about 29,050 lenses in 2019. The total of estimates for Aier and the Tier 2 distributors is 70,050 lenses.

3 https://www.hpyk.com/ynxw/16725.html

Source: Chinese government record via Qixin

STAAR Greater China Director Liu Juan giving a talk. Liu Juan is the independent director for Shanghai Leyue, which Lansheng says is its largest Tier 2 distributor. Source: Shanghai Heping Hospital.3

https://www.hpyk.com/ynxw/16725.html


August 11, 2020

STAAR Surgical STAA

The largest Tier 2 distributor is Shanghai Leyue Optical Equipment Co. Ltd., which was set up by former STAAR China sales staff. According to Lansheng, Leyue sells 20% of the lenses consumed in China and is the agent for Shanghai, Zhejiang, Jiangsu, and Anhui provinces. The principal owner, Pan Jie, is former regional sales director for STAAR according to three of our interviews, and company Independent Director Liu Juan, pic-tured above giving a talk at a STAAR event in 2016, is former China direc-tor for STAAR.

But our visit and calls indicate that the company does not have any real op-erations. When we called, the person answering the phone refused to iden-tify the company. We asked to speak with a salesperson and were refused. The receptionist refused to provide us with an address or product brochure. When we visited the registered office location, the company’s name was nowhere to be seen. A different company called Shanghai Chengwei Inte-rior Decoration Co. is at the same address. The office does display a poster showing the STAAR EVO lens.

The second shell-company distributor is Shanghai Qinghong Trading. Lansheng staff say that Qinghong is the distributor for Shandong, Tianjin,

Left: hallway outside Leyue office. Right: Mixed office and residential building where Leyue is located. | Photos by J Capital Research July 2020


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STAAR Surgical STAA

Henan, and Hong Kong. Government documents show that Qinghong is owned by Lansheng’s chairman, Zhang Jian. We were unable to find any staff for this company. The company telephone is the same as that for Lan-sheng Resources, as is the website. The company office does not look like it belongs to a major medical distributor.

Missing exports from SwitzerlandAll product shipped to international markets is shipped from a STAAR facility in Nidau, Switzerland, which mostly repackages products made in STAAR’s Monrovia, California factory. Lansheng, which accounts for 100% of China sales, imports all STAAR ICLs from Switzerland. But Swiss re-cords showing exports of implantable contact lenses to China indicate sales far lower than those claimed by STAAR.

Swiss export records4 show just $23.5 mln in exports of implantable con-tact lenses to China for 2019, compared with STAAR’s reported China sales of $64.8 mln. The exports to Hong Kong are de minimis, so the gap cannot be explained by gray-channel imports through Hong Kong or by the mar-gin Lansheng makes.

4 Data can be found on this website: https://www.gate.ezv.admin.ch/swissimpex/index.xhtml. We believe the most relevant category is 9021.9000.

Screenshot from Swiss-Impex August 2020

https://www.gate.ezv.admin.ch/swissimpex/index.xhtml


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STAAR Surgical STAA

The figure likely understates STAAR sales in China due to issues of catego-rization or tariff “minimization.”

The Swiss statistics do not provide a precise estimate of China sales, but they do support our view that sales are lower than claimed. We found sup-porting evidence by visiting the Nidau facility, where activity seems too slow to support the company’s contention that 88% of its total product is shipping from that location.

Our investigator visited STAAR’s facility in Nidau and offices under con-struction a few minutes away in Brugge. He spoke with employees and people in the neighborhood estimated that about 20 people work in manu-facturing, packing, and shipping for STAAR on the site. This compares with 45 staff reported for STAAR Nidau in an article that appeared in Switzerland’s Neue Zürcher Zeitung in 2000, when STAAR was renting the same premises.5 In other words, STAAR staff in Nidau has declined over a 20-year period.

5 The German-language article can be downloaded here: https://jcapitalresearch.box.com/s/xtmfmdg6ovbb6yfx2cjec9k9iyp3n2bu

Total Value in CHF 21,436,831 CHF

Total Value in USD $23,583,443

STAAR reported sales to China 2019 $64,800,000

Difference 63%

Table 3. 2019 Swiss Exports to China of HTS 9021 Implantable Lenses

Source: Swiss-Impex, STAA disclosures

https://jcapitalresearch.box.com/s/xtmfmdg6ovbb6yfx2cjec9k9iyp3n2bu

https://jcapitalresearch.box.com/s/xtmfmdg6ovbb6yfx2cjec9k9iyp3n2bu


August 11, 2020

STAAR Surgical STAA

STAAR has recently rented a new facility in Brugg, a three-minute drive from Nidau, for administrative offices and is moving some manufacturing to Nidau.

The Brugg facility. | Photo by J Capital June 2020

Loading dock at the Nidau facility. | Photo by J Capital June 2020.


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STAAR Surgical STAA

Underwhelming manufacturing levelsWe think STAAR may be producing fewer lenses than it claims. Invento-ries have actually declined over five years despite a 95% increase in in-come. The dollar value of work in process has declined 6% in five years, falling every year except 2018. They have not disclosed changes to the method of classification for inventory.

Because prices were dropped significantly in 2015-16, according to our interviews, volume must have increased even more than the 95% realized in income growth. Yet there is no build-up of raw materials, no staff addi-tions at the Collamer plant in Aliso Viejo, and no bottlenecks in production. Executives say that the STAAR process is expensive, with material costs of at least $50 per Collamer “button” going into the lens and with high levels of waste, so increased production should lead to higher raw materials and work in process costs.

Nidau facility under construction. | Photo by J Capital June 2020


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STAAR Surgical STAA

Considering the very steep ramp up in sales, and the manufacturing time of one to two months, work in process has barely budged during the last four years.

The company did report a sharp rise in works in process in Q2, but raw materials declined, and finished inventory was flat.

A weird stasis has long applied to inventories.

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Inventory up only some 16% in total over @5 years

Cost of sales up some 81% in total over @5 years

Chart 4. STAAR Inventory Components (FIFO) Vs Cost of Sales

Source: Company reports

Chart 5. STAAR Sales vs Inventories and Works in Process



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STAAR Surgical STAA

This flat pattern is remarkable, because in several conversations with pro-duction executives at STAAR, we have learned that the lens-production process takes about six weeks start to finish and requires a lengthy period of baking the lenses. Rapid growth in production, therefore, would neces-sarily entail a build-up in works in process.

STAAR formers have told us that they have not seen the increase in manu-facturing activity that would support the reported 41% sales growth. No one, including former managers who worked within STAAR’s manufactur-ing facility in Monrovia, can say what the unit production volume is.

STAAR’s secret sauce is its own patented raw material, a bio-compatible mix called Collamer. The material is produced in a facility in Aliso Viejo, California. This facility employs about 20 people, according to our inter-views, and has not expanded either equipment or personnel in two decades. Although STAAR is adding to its production facilities in both California and Switzerland, no additions are planned in Aliso Viejo.

TaxesSTAAR’s cash taxes have remained puzzingly flat over the last five years despite the company’s move from losses to profits and a near tripling of profit in 2019. We consulted with tax specialists in Switzerland and the U.K., but they could not think of a reason why STAAR’s cash taxes would not have risen.

VAT: The company has reported no growth in VAT receivable over five years despite very significant growth in sales in international markets where VAT returns are accrued. VAT receivable declined from $724,000 in 2015 to $713,000 in 2019 even though international sales had grown over that period by 188%.

2017 2018 2019

Cash taxes paid $881 $635 $792

Net income $(2,139) $4,968 $14,048

Table 4. Cash Taxes and Net Profit (,000 USD)

Source: Company filings


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STAAR Surgical STAA

Return volumes fall shortWe learned in interviews that doctors order duplicate lenses in between 30-100% of surgeries. They almost always return one pair unused. Yet we counted 33 lenses returned each month during the busy season from a distributor who claims to be selling 24,000 per year. With that volume, the distributor should be returning at least 600 lenses per month.

Inventory levels as reported by distributors are well below what would be required to support 138,000-150,000 annual lens sales in China. All the Tier 2 distributors together told us they had about 1,000 lenses in invento-ry, and Lansheng formers told us that company generally holds about 1,500 lenses. Distributors told us that hospitals do not hold inventory. A few Aier hospitals hold some inventory, but interviewees said those inventory levels were in the hundreds.

ComparablesThe Hong Kong-listed company EuroEyes International Eye Clinic Limited (1846 HK), which operates eye clinics in China and is a shareholder as well as a client of STAAR’s, reported 6.8% growth in 2019 and partly blamed

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Chart 6. VAT Receivable ($,000) and Growth in International Sales YoY


Source: Euroeyes 2019 Annual Report page 9


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ICL sales for slow growth. This contrasts with STAAR’s assertion that China’s market is in hyper growth.

CashSTAAR’s Q2 report showed that the company earned almost no interest on its large cash balance of $116 mln—just $20,000, versus $216,000 in Q1 despite holding more cash. This is a net number, but debt is tiny, at $1.3 mln. The company in May 2020 issued a shelf offering, which is odd, since STAAR is sitting on more than 5x as much cash as it ever had prior to the secondary offering in 2018. We are hesitant to accuse any company of mis-leading investors about cash balances, but this is not right.

Who is Lansheng?Curiously, STAAR reports a “hybrid distribution” model in China and yet 100% of China sales are attributed to its distributor, Lansheng.

The chairman of Lansheng, Zhang Jian, bought the medical-equipment piece of a state-owned enterprise in 2008. At that time, STAAR had just entered China through a distribution agreement with a company called Hangzhou Guochang Trade. The Hangzhou company brought sales from from $2.9 mln in 2009 to $8.4 mln in 2012. Then STAAR took back dis-tribution. In Q4 2015, STAAR gave up on doing direct sales and handed import and distribution to Lansheng. In the same quarter, STAAR signed a “strategic cooperation” with Aier.

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Chart 7. STAAR Cash Balances and Debt vs Annualized Gross Interest Rate



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STAAR Surgical STAA

Shortly after signing with STAAR, Zhang Jian spirited the STAAR distri-bution business into a separate company registered in the British Virgin Islands. He used that BVI, called Visiontec, to establish a Shanghai shadow company whose English name is the same as Lansheng’s. Although the two Lanshengs are owned by the same person, they are not the same com-pany, but STAAR has never made a new disclosure.

BVI company shareholder lists are confidential. Creating a shadow com-pany with offshore ownership could enable Lansheng owners to engage in offshore currency and share transactions.

Fiscal Year Net Sales ($, in thousands) Net Sales as Percentage of Consolidated Net Sales

2013 7,191 10.0%

2014 7,990 10.7%

2015 11,851 15.4%

2016 16,025 19.4%

2017 23,881 26.4%

2018 46,070 37.2%

2019 64,820 43.2%

Source: STAAR 10Ks

Table 5. Sales to Lansheng


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Top left: The Lansheng office in Shanghai. Top right and below: Lansheng maintains a registered address at the location pictured in the following two photos above, on the remote Chongming Island in Shanghai. Chongming offers deep discounts to the Value-Added Tax and income tax for companies that run their accounts through the district. | Photo by researcher April 2019.

STAAR Surgical STAA


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Collamer material made in Aliso Viejo

Lenses milled in Monrovia

Lenses shipped

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Sijun Trading clears Customs

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NidauNidau

Chart 8. Product Flow

Source: J Capital* A Lansheng executive recently established a company called Sijun Trading, which imports the lenses from STAAR in

Switzerland, according to our interviews. Lansheng then purchases the lenses from Silun.

Ways and meansThere are several strategies STAAR appears to use to balance out overstated revenue and profit. One strategy is an inflated marketing budget. Another is R&D. We believe STAAR’s R&D expenditure, $25.3 mln in 2019, is dramati-cally overstated. After interviews with former STAAR executives throughout the research and clinical operations and an estimate of the cost of the current


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Title Status Year Completed Estimated enrollment Locations

Prospective Comparative Study of Refractive Outcome of STAAR and Alcon Toric Intraocular Lenses

Completed 2010 100 Singapore, 1 location

Rotational Stability After Nanoflex Collamer Toric Intraocular Lens Implantation in Astigmatic Patients

Unknown status 2017 60 Italy, 1 location

Chart 6. STAAR Clinical Trials

STAAR Surgical STAA

clinical trial, we believe that actual spending on R&D may be around $5 mln. Another $3.2 mln is recorded in R&D as stock-based compensation expense. We think more than $15 mln could simply be invented and another way for the company to reconcile inflated sales.

On the R&D budget, we conducted interviews with two highly placed former R&D executives and with two other former employees working in R&D at STAAR. They estimated total internal spending on R&D at less than $5 mln. As for how much R&D has been contracted out, one of the executives said: “I would say none.”

That leaves clinical trials to drive budgets, but the costs there also do not ap-proach the more-than $20 mln booked annually. We walked through the costs with an R&D executive at a competing company who runs trials. This execu-tive estimated that the biggest cost for trials consists of payments to surgeons and agreed with our high-end estimate of $20,000 per patient for surgery a follow-up, plus a $100 payment to the patient.

“To run a clinical study of the type the FDA would require could be $1-2 mil-lion a year and could be $2-3 million a year plus some follow-up,” one former executive told us.

Remediation for the quality problems identified by the FDA in 2014 would have been included in the R&D budget and could have cost up to $3 mln a year between 2014 and 2018 on the high end, according to a former executive.

STAAR’s biggest trial, seeking approval of the EVO lens in the U.S., is recruit-ing 333 subjects. We estimate that fees to surgeons and patients and manage-ment costs over a two-year period for this trial might be roughly $10 mln.

The table below displays all the clinical trials that STAAR has reported to clinicaltrials.gov since 2010.


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Title Status Year Completed Estimated enrollment Locations

Randomized, Prospective Comparison of the Outcome of Toric Implantable Contact Lens (TICL) and Q-LASIK for the Correction of Myopia With Astigmatism

Unknown status 2008 30 China, 1 location

Clinical Performance of a Phakic Intraocular Lens (IOL) Completed 2019 41 Belgium, Spain: 5

locations

Rotational Stability of V4C Toric Implantable Contact Lenses After On Axis Implantation Measured With OPD Scan 3

Unknown status 2018 75 Korea, 1 location

Endothelial Cell Loss After Penetrating Keratoplasty Completed 2020 8 Egypt, 1 location

Multicenter Clinical Trial of a Phakic Implantable Collamer Lens (ICL) Recruiting 2023 333 U.S., 14 locations

Comparative Analysis of the Visual Performance After TICL Implantation in Patients With Stable Keratoconus

Unknown status 2016 24 Tehran, Iran, 1 location

Prospective Evaluation of Near and Intermediate Visual Outcomes With Monofocal Intraocular Lenses: The Mast Study

Unknown status 2012 200 U.S., 1 location

Source: https://clinicaltrials.gov/ct2/home

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Note the trial in Iran, a sanctioned area for U.S. companies. Although Clini-caltrials.gov shows 1,061 trials in Iran, the STAAR trial is the only one we could find sponsored by a U.S. company.

Lansheng formers estimated 2,000-3,000 lenses returned per year. At Lan-sheng’s price, 2,500 returned lenses would be valued at about $1.2 mln.

Suspicious H1 volumesAsia was gut punched by Covid-19, but STAAR reported growth. As usual, the company relied on China for the bit of good news it had to offer. In Q2, China distributor Lansheng accounted for 53% of sales and 57% of trade receivables. For the first half, STAAR said that Chinese unit sales rose by 7% and revenue declined by 2.7%, suggesting sharp discounts. In fact, sev-eral eye clinics told us that they were discounting ICL surgery, usually by about 15%.

But we interviewed 19 doctors, distributors, and marketing platforms that promote eye surgery. They said that the number of ICL procedures in China from January through June had declined by around 50-60%. Chinese clin-

https://clinicaltrials.gov/ct2/home


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STAAR Surgical STAA

ics were closed for at least two months, sometimes more.

In May, we spoke with a Lansheng former who is in regular touch with for-mer colleagues. This former executive estimated that Q1 sales were down 30% YoY in terms of volume and that Q2 would be more or less flat with Q2 2019.

Hospitals echoed this decline. “We did not perform any surgeries in April through June,” said a medical assistant at a large public hospital in Chengdu.

“In the second quarter, our ICL procedures were 60% of what they were last year,” said an eye surgeon in Lanzhou.

A doctor in Beijing told us that elective procedures at his hospital were down by at least 50% in May due to quarantine rules for patients coming from outside the city, while additionally, patients without urgent medical conditions were reluctant to go to hospitals. A current Lansheng employee estimated that Q1 sales had dropped by at least one-third.

“In Q1 this year, we sold about 1,000 lenses—that’s a drop of more than 50%,” a Beijing-based distributor told us.

“This year from January through April we really didn’t do any [ICL surger-ies]” an eye surgeon at a major Beijing hospital told us. In 2019, this hospi-tal saw 7% growth in ICLs.

If the growth that STAAR reported came from packing channels with in-ventory, the inventory is not with Lansheng. Inquiries with Lansheng and STAAR employees indicated that Lansheng in H1 was carrying substan-tially less than its usual inventory because of concerns that the coronavi-rus would make the lenses unsaleable. A Lansheng former also said that STAAR was worried that receivables could go unpaid.

Lansheng represents 100% of sales in China. If both sales and inventory were down, it is impossible that China sales grew.

The coming declineIn the Q2 call, STAAR offered a rosy outlook, saying that Q3 would see at least 20% sequential growth and double-digit growth year on year. Mason said that China in July had “on several days, hit implantation records.”

Our hospital interviews indicate that July did have much higher volumes but that these were make-up volumes for May-June.


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Date InstitutionQ1 Compared With Q1 2019?

Q2 2020 Yoy?

How Was H1 Compared With The Same Period In 2019?

What Kind Of Growth Or Decline Do You Expect For The Full Year 2020?

7/14/20 Changchun, Jilin lens distributor

1 lens in 2020 compared with

20 in 2019.

0 compared with 40 in Q2

2019.

In H1 2019 we implanted about 80 lenses. In 2020 H1

just 1.

Down 50%

7/13/20 Sichuan hospitalNone in Q1

2020. 20 in Q1 2019.

0 compared with 20 in Q2

2019

Around 50 surgeries in H1 2019. None in

2020.Don't know

7/13/20 Zigong, Sichuan hospital 50% down About the

same Down 50% 30-50% lower than our target

7/13/20 Chongqing hospital Poor About the same Down 10% Hard to say, we'll be lucky if we

sell 100 lenses.

7/13/20 Guizhou hospital About the same

Q2 was down by about a dozen

surgeries.

down Down by around 25%

7/13/20 Guiyang, Guizhou hospital Down 50% down about

30% down 30%This year due to the virus we

sold 400-500 lenses, about the same was last year.

Chart 7. Interviews

STAAR Surgical STAA

One of the largest Aier hospitals, occupying four floors of a shopping cen-ter in Beijing, told us that ICL surgeries were down 33-50% “during the pandemic” but had recovered in July to about the same level as July 2019. Another clinic said that volumes had doubled over July 2019 but had been sharply down in the first half.

“In May, the hospitals started gradually to get back to normal, and this led to explosive growth in July,” a Lansheng Tier 2 distributor told us.

“In April through June, we didn’t do any surgeries,” a hospital in Chengdu told us. “In July, numbers grew 20% compared with July last year.”

We do not believe the summer months will make up for lost business in the first half.

We spoke with 19 eye hospitals and distributors that purchase from STAAR about their sales volumes in 2020 versus 2019. Six refused to disclose sales volumes. Two said their businesses had returned to normal volumes by May. The remaining 11 were seeing dramatic declines in implant surgeries and expected the full year would be significantly lower than last year.


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We visited nine eye hospitals in Beijing and Shanghai in August to check-on business. We did not find anyone lining up out the doors, though the hospitals told us volumes were back more or less to normal.

Date InstitutionQ1 Compared With Q1 2019?

Q2 2020 Yoy?

How Was H1 Compared With The Same Period In 2019?

What Kind Of Growth Or Decline Do You Expect For The Full Year 2020?

7/13/20 Lanzhou, Gansu hospital

0 compared with 4 lenses lest year Q1.

Down about 50% Really poor

This isn’t a core offering for us. Last year we sold about

20 lenses. This year might be about the same.

7/13/20 Xian, Shaanxi eye clinic

About a dozen lenses

compared with 50-60 last year

Q1.

Down a little bit

Much worse than 2019

We just hope we can do the same as last year.

7/13/20 Beijing lens distributor 02 lenses 2020 H1 versus 20

in 2019 H1.

Two lenses in H1 2020 versus 20 in H1

2019.

We expect to do fewer than 10 lenses this year. We did 30 last

year.

7/14/20 Beijing eye clinic About the same

About the same Same

We did 300-400 lenses last year. We expect this year to

improve. In April and May the volume returned to normal.

Source: J Capital

STAAR Surgical STAA

Waiting area at Shanghai Aier. | Photo by researcher August 2020.


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The Aier Intech Eye Hospital in Beijing, a large buyer of ICLs. Staff told us that volumes had been down 30-50% through June but in July were at normal levels. | Photo by J Capital August 2020.

Waiting area at Shanghai Purui | Photo by researcher August 2020.


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AuditTechnically, STAAR has a very small operation in China, relying on Lan-sheng to do sales, and does not need to be audited in China. But STAAR derives 43% of its revenue from the Chinese market and has a large mar-keting budget that is presumably dedicated to China.

Interestingly, our interviews showed that STAAR does not have an ERP in place; its IT system consists only of the Online Calculation and Ordering System (OCOS)6 used by doctors to choose the right size and magnification for a patient’s lens. The actual ordering is done in batches by emailed Excels and in phone calls. Lansheng says that they order the commonly used mag-nifications in batches rather than ordering specific lenses for specific proce-dures. Lansheng built its own inventory management system in 2018, but its sub-distributors generally use a manual system for inventory management.

6 https://ocos.staarag.ch/landing/

The C-Mer (Beijing) Dennis Lam Eye Hospital told us that volumes had come back to normal in July but without many ICL surgeries. The hospital is offering discounts of 20-25%. | Photo by J Capital August 2020.

https://ocos.staarag.ch/landing/


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Blurring the picture for investorsSTAAR has a pattern of lying to investors and regulators. The company paid out $10.7 mln to settle two separate class-action lawsuits over a de-cade: both of the lawsuits alleged that STAAR hid from investors deficien-cies found by the FDA in STAAR’s management processes.7 Court and FDA records show that the company got trial subjects to backdate consent forms, ignored counter indications, “lost” documentation, could not find (or refused to disclose) the password to the ordering system. In one lawsuit, a STAAR executive said the company instructed her to provide false in-formation to the FDA.8 Like other the lawsuits against the company, this was settled out of court, and details are unavailable. But we spoke with an employee who worked in quality control until mid-2019, who told us that the company continues to “hide things for audits.”

The company’s lawsuits could fill their own 10K:

‣ November 2000: Former employee Kirtida Patel sued the company, alleging that management had instructed her to withhold informa-tion from the FDA and had lied to the FDA.

‣ December 2000: A shareholder derivative suit alleged self-dealing and waste of assets by directors.

‣ October 2001: Novastaar Investments, LLC sued to win the right to inspect records pertaining to $6 mln in loans to directors, service contracts paid to companies owned by directors, $24 mln in asset write-offs, defaulted loans, and other transactions.

‣ June 2007: the company was warned by the FDA for failing to re-spond to adverse events from clinical trials. The FDA advised that STAAR hire an independent auditor. The company declined to take that step. The FDA later told STAAR that its response was “inad-equate.”

7 $7 mln 2018 settlement: https://www.massdevice.com/staar-surgical-settles-class-action-suit-7m/. $3.7 mln settlement in 2006: http://securities.stanford.edu/filings-documents/1032/STAA04-01/2006526_r01x_04CV08007.pdf Another suit is being organized around poor disclosure of FDA action in May 2019: https://www.globenewswire.com/news-release/2019/06/25/1874172/0/en/SHAREHOLDER-ALERT-Pomerantz-Law-Firm-Investigates-Claims-On-Behalf-of-Investors-of-STAAR-Surgical-Company-STAA.html

8 See STAAR annual report 2000 page 17, “Kirtida ("Kirty") Patel v. STAAR Surgical Company, Orange County Superior Court; Case No. OOCC13556.” - 4 -

http://securities.stanford.edu/filings-documents/1032/STAA04-01/2006526_r01x_04CV08007.pdf

http://securities.stanford.edu/filings-documents/1032/STAA04-01/2006526_r01x_04CV08007.pdf

https://www.globenewswire.com/news-release/2019/06/25/1874172/0/en/SHAREHOLDER-ALERT-Pomerantz-Law-Firm-Investigates-Claims-On-Behalf-of-Investors-of-STAAR-Surgical-Company-STAA.html




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‣ February 2015: The FDA issued a letter containing 10 “observations” focusing on the need for improved procedures, processes and docu-mentation and broader environmental monitoring. A quality inspec-tor we spoke with who worked at the Monrovia facility told us that in late 2019, procedures will have not been improved.

‣ 2015: Two activist shareholders demanded changes to the board to address chronic losses and what they said was the company’s in-ability to exploit growth opportunities in China. No changes were made, but STAAR appointed Lansheng as its distributor in China and growth accelerated.

‣ June 2016: Kevin Forestal filed a stockholder derivative complaint claiming that STAAR disseminated misleading statements to inves-tors and engaged in unjust enrichment.

Executive compensationWe find company compensation to be out of proportion to results. Despite al-most unbroken losses through 2017, top executives took option awards worth $9.7 mln in 2016-19 and total compensation averaging $1 mln per year.

Lansheng enabled STAAR to end a history of losses that had been broken just twice since 1995, and the black ink helped double compensation for CEO Caren Mason and other members of the executive team. STAAR’s targets for executive bonuses and share compensation incentivize overall revenue and profit growth (or a reduction in losses). In 2019, Mason made $3.6 mln in cash and share options, an increase of 38% over 2018 compen-sation of $2.6 mln

2016 2017 2018 2019 Total

Andrews, Deborah J. CFO - $1,475. $823 $854 $3,153

Barnes, Scott D. CMO - $608 $949 $1,246 $2,803

Blickensdoerfer, Hans-Martin Sr VP $770 $699 $1,102 $1,032 $3,604

Holliday, Keith CTO $635 $853, $1,092 $1,072 $3,653

Mason, Caren L. CEO $1,526 $1,866 $3,627 $3,616 $9,635

Chart 8. Calculated Total Compensation (,000 USD)

Source: Capital IQ

STAAR Surgical STAA

Anne Stevenson-Yang [email protected] +1 860 391 6094

DisclaimerThis publication is prepared by J Capital Research USA LLC (“J Capital”), a US registered company. This publication is distributed solely to authorized recipients and clients of J Capital for their general use in accordance with the terms and conditions of a Services Agreement and the J Capital Authorized User Content Agreement available here. Unauthorized copying or distribution is prohibited. If you are reading this publication without having entered into a Services Agreement with J Capital, or having received written authorization to do so, you hereby agree to be bound by the J Capital Non-Authorized User Content Agreement that can be viewed here. J Capital does not do business with companies covered in its publications, and nothing in this publication should be construed as a solicitation to buy or sell any security or product. In preparing this document, J Capital did not take into account the investment objectives, financial situation and particular needs of the reader. This publication is intended by J Capital only to be used by investment professionals. Before making an investment decision, the reader needs to consider, with or without the assistance of an adviser, whether the contents are appropriate in light of their particular investment needs, objectives and financial circumstances. J Capital accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this publication and/or further communication in relation to this document.

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Share compensation in 2019, $11.6 mln, was equivalent to 82% of STAAR’s 2019 net income. In Q1 this year, despite losing money, STAAR still issued $2.9 mln in new stock-based compensation.

Management has impeccable timing when it comes to share sales.

‣ On June 14, 2018, Director William P. Wall and two other insiders were awarded shares. On August 1, the company raised guidance. On August 20, Wall sold 5,000 shares.

‣ Between November 14 and December 13, 2019, five insiders sold shares. On January 2, 2020, longtime investor and activist Broad-wood Capital sold a block of 41,220 shares.

‣ On March 18-20, 2020, six insiders acquired shares. On May 6, against all Covid-19 odds, the company announced strong growth in Q1. On May 11-15, the same six insiders sold shares.


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STAAR Surgical (STAA) Medical Technology · Anne Stevenson-Yang [email protected] +1 860 391 6094 See final page for disclaimers. 5 August 11, 2020 STAAR Surgical STAA ‣